Brown Brothers Harriman Prefers EM Stocks To US Bonds

By Michael Aneiro

Late last week I spoke with Scott Clemons, chief investment strategist Brown Brothers Harriman. As part of my Current Yield column in this week’s Barron’s magazine, Clemons highlights the importance of wage growth in gauging inflation and any eventual increase in bond yields. He also said bonds aren’t doing what they were designed to do at today’s ultra-low yields:

“From an asset allocation standpoint, fixed income should provide you with three things: a source of yield, a store of liquidity and an anchor of stability against stock swings,” Clemons says. “In a normal environment you can get all three in a single security, but today you have to choose.”

Here’s some more of my conversation with Clemons, starting with him expanding on the recent role of central banks in bond markets:

We have long been of the opinion that interest rates are going to stay lower for longer. And what we’ve seen [last week] from the ECB, while well-telegraphed, is further confirmation of that…. The Fed is far more concerned about deflation than inflation, and that gives them carte blanche to leave rates low for now. My expectation is that by this time next year the Fed will begin talking up rates. I think the Fed views communication as every bit as powerful a tool as the rest of the tools in their toolbox. And then after that I think you’ll see that step function of a 25 basis-point raise at every [FOMC] meeting until rates normalize. I do think that ‘normal’ in the new world is lower than it was in the old world.

Many types of bonds look rich now, and Clemons says large-cap domestic equities look rich too, and that he’s currently looking to emerging-market equities as one of the few good values out there:

We think large cap domestic equities are fully valued. The only place that we have put new assets to work lately is emerging-market equities. When we look at valuations on offer there, the valuation gap is bigger than it was since 1998 after the Thai baht crisis and Russian revaluation.

Clemons said the bulk of the firm’s emerging-market investment is currently going into China, India and Mexico, through direct stock investments rather than exchange-traded funds.

The dynamic that we’re really looking to gain access to is the growing purchasing power of a growing middle class, so things like consumer staples and consumer discretionary [stocks].

Amey Stone is Barron’s Income Investing blogger and Current Yield columnist. She was formerly a managing editor at CBS MoneyWatch, MSN Money and AOL DailyFinance. Her responsibilities included overseeing market coverage and personal finance topics. Prior to those roles, she was a senior writer at BusinessWeek where she authored the Street Wise column online and contributed to the magazine’s Inside Wall Street column. Topics covered included economics, corporate finance, Fed policy, municipal bonds, mutual funds and dividend investing. She co-authored King of Capital, a biography of Citigroup Chairman Sandy Weill. She is a graduate of Yale University and Columbia University’s Graduate School of Journalism.